The buyer wants to exclude our raw materials inventory from our Net Working Capital peg, claiming some of it is slow-moving. How do we defend this inventory and prevent a downward adjustment to our cash at close?

Question

Tyler Smith · Accepted Answer

Buyers often attempt to label inventory as slow-moving to negotiate a lower Net Working Capital (NWC) peg. This strategy effectively forces you to leave more cash in the business at close. To effectively defend your raw materials inventory and prevent a downward adjustment, you must come to the negotiating table armed with data.

Strategic Defense of Inventory

Your defense should focus on demonstrating the operational necessity and usability of your raw materials.

Operational Data

• Review Inventory Turns: If your business uses a framework like EOS, you should have historical Scorecard data showing your average Days Inventory Outstanding (DIO). Present this data to the buyer.
• Match Production Requirements: Clearly demonstrate that your raw materials inventory aligns with your actual production needs. This counters the "slow-moving" claim.
• Strategic Safety Stock: Prove that what they perceive as slow-moving is actually strategic safety stock. This stock protects your business from common challenges like [supply chain disruptions](/qa/identifying-operational-risks-before-buyer-due-diligence) and helps maintain your high customer fulfillment rates.

Aging Analysis

Perform a detailed aging analysis on your inventory.

• Categorize Materials: Categorize the raw materials to show their age and type.
• Usability: Crucially, demonstrate that all materials, regardless of age, are still fully usable in your current production lines.

Valuation and Negotiation

Under the IVS 105 Market Approach, your working capital must accurately reflect a normal operating cycle for your business.

• Long Production Cycles: If your business involves a long production cycle, carrying a certain level of raw materials inventory is a standard requirement, not an operational failure. This is a critical point to make in your defense, as it impacts [how buyers value a business](/qa/understanding-business-valuation-multiples-market-approach).

Defining Slow-Moving Inventory

It is imperative that you negotiate a clear definition of slow-moving inventory within the purchase agreement.

• Avoid Generic Exclusions: Do not accept a generic, blanket exclusion that gives the buyer too much discretion.
• Specific Criteria: Insist on precise criteria, such as:
• Only inventory that has been completely inactive for more than twelve months.
• Inventory that cannot be used for any active customer orders.
• Prevent Arbitrary Clawbacks: Establishing these specific terms will prevent the buyer from making arbitrary clawbacks or adjustments post-closing.